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Practical Applications Summary
In Liabilities Matter: Improving Target Date Glidepath Construction through Liability Adaptive Asset Allocation, from the Summer 2019 issue of The Journal of Retirement, author Michael W. Crook (of UBS Global Wealth Management in New York, NY) calls into question the rationale behind the most popular investment funds in today’s employee defined-contribution (DC) plans. Target date funds (TDFs)—which, for example, are held by 75% of participants in DC plans managed by Vanguard—use a preset schedule called a glidepath to reallocate assets from equities to fixed-income securities as a participant’s retirement date approaches. The author finds that this approach does not work as well as the liability-driven investment (LDI) strategy used by pension plans. LDI is more responsive to the needs of participants because it focuses not on participants’ retirement dates, but on how close they are to having enough money on which to retire. It reallocates assets to fixed-income securities as a participant’s plan balance approaches the amount needed to fund all retirement expenses. The author finds that LDI produces better outcomes, is easier to explain to clients, and makes it easier for financial advisors to provide customized financial planning and total wealth management for their clients.
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